Insurance companies returned about $ 9 billion dollars from premiums since 2011 because of an Obamacare provision to cap how much profit they can make, according to a new Department of Health and Human Services (HHS) report released Thursday.

Actually the MLR thingy was always a con. First, this regulation had never been tried anywhere. A couple of states tried it with lower ratios but without success. There was absolutely no evidence it was either a good idea or would work without big unintended consequences.

One of those consequences is obvious. Insurers are free to overcharge people, collect the money, earn interest on it during the course of a year, and rebate the overcharge 18 months later. So consumers in effect are simply giving the insurers an interest free loan for a year. That is why there has been $9 billion in rebates. This is not a good thing. Consumers unwillingly loaned insurers $9 billion for a year and got nothing in return.

Comments (17)

The unintended consequence that I’m most worried about is that some beneficial functions are counted as an administrative cost, while some non-beneficial expenditures are counted against medical loss. Take funds spent on fraudulent medical claims. These count towards the 80% to 85% medical loss. By contrast, effort to rout out fraud count against administrative costs. This suggests firms are only willing to spend $0.15 looking for each $1 of fraud.

Devon is incorrect in assuming that insurers are “are only willing to spend $0.15 looking for each $1 of fraud”; it is worse, in that the Obama administration is creating a disincentive to spend anything on Audits. Assume that the MLR for a given pool of policies was 85%, and that the insurer (absent Fraud investigation) had exactly $1,000,000 of premiums and $850,000 of claims, in which case the insurer would have exactly hit the minimum and owe no refund. Further assume that spending $15,000 on additional Fraud detection would result in $100,000 of claim recoveries. Under ACA, HHS was to seek input from the NAIC on this topic. NAIC recommended that the $15,000 spent in identifying fraud could be treated like a claim as long as it did not exceed the $100,000 recovery. So by spending $15,000 on audits, the claims would fall to $765,000, and the insurer would owe an MLR refund of $85,000…which was exactly equal to their net recovery ($100,000 less the $15,000 cost), so they neither lost money, nor made money, but they would have benefited their customers and presumptively earned some good will for next year. BUT HHS REJECTED THE NAIC RECOMMENDATION, so the $15,000 of money spent by the insurer continues to be an admin expense, and the full $100,000 would be refunded to customers…and the insurer is $15,000 worse off for having saved the customers $100,000. So HHS has created a disincentive for insurers to cut the cost of insurance via audits.

Insurance companies are also able to overcharge on purpose with the goal of being able to keep a greater dollar amount of the premium as profit after rebates are paid out. For example, if an insurer collects on average per customer $100 then pays out $15 in expenses and keeps $5 in profit, it could yet choose to charge $110 instead, retain $22(15% of premium) and pay out the $10 in expenses, and thereby keep $12 in profit. This is another potential consequence of an idea that may sound good but really is not necessarily the case. The amount of rebates is a truly meaningless number.

I am not at all a fan of capping a businesses profits. What business is it of the federal government how much profit a business makes? What exactly is an “acceptable” amount of profit?

Competition is what keeps prices in check, along with the law of demand. So, yes, insurance companies, like any other company, can try to raise prices all they want. That doesn’t mean that people will pay those prices.

The ironic thing is that a third party payer system actually encourages higher prices because the patient doesn’t pay the full cost of the medical care.

Steve, in a normal market price competition would forestall overcharging, but under Obamacare there are no real prices. There are so many varying subsidies that very few people know what the actual price of the product is. And, not just direct subsidies of individual purchasers, but also subsidies of the insurance companies themselves. This means there is no price discipline so overcharging is easy.

Plus, the whole idea of the MLR fails to account for investment income from reserves. MLR is strictly premium vs. medical expense. If a company can pull in extra money to hold in reserve, the income from that money is not included in the MLR calculation.

The health insurance industry has always been a competitive business with relatively low profit margins. I don’t think the MLR rules are necessary at all to ensure a competitive marketplace especially now that insurers have to take all comers at standard rates based on age.
However, I was told by a former CMS Administrator that Medicare Supplemental Plans typically achieve MLR’s in the 65%-70% range but they are not subject to the MLR limits. Insurers can turn applicants down for those policies unless they are purchased as soon as one becomes eligible for Medicare or if you can meet one of the life changing event exceptions like losing employer coverage due to retirement or because the employer stopped offering the insurance benefit to retirees. If you want to switch from a Medicare Advantage plan back to standard fee for service Medicare, you cannot buy a supplemental plan unless you can pass medical underwriting.

As to your last sentence, that is not true in Massachusetts. Because Medigap plans are basically regulated by the states, I assume it is a state by state decision. In Massachusetts a Medicare beneficiary can sign up for one of the two available types of Medigap (we do not have 10 Medigap Plan choices like most states; the Massachusetts politicians think we seniors are stupid) any month for any reason guaranteed effective the next month. Many switch back and forth between the two types of plans once or twice a year depending on upcoming surgery or travel plans playing premium savings against co-pays and deductibles and coverage outside the US.

However neither of our Medigap plan choices has an annual out of pocket spending limit so if that is what you want (that is why you buy insurance, no?) you have to choose a public Part C Medicare Advantage health plan

I would also note how the terms “medical care” and “administration” are much different in the MLR than most people think. There’s a lot of administration in “medical care” thanks to the NAIC definitions, such as data collection, data systems, and reporting to the government.

Notwithstanding the points already made, the subjects I’ve seen little attention paid is this, “How much did it cost the insurance companies to calculate the overage?” “How much has it cost businesses to receive and redistribute these overages?”.

With many clients receiving money, I can attest to the mass confusion and significant waste of time that these inconsequential amounts cause. Most of the “rebates” are less than $20, many less than $10. Yet it takes an employer hours to figure who gets what, and then how to get it to them.

If this time is valued, my hypothesis is that it’s a significant net loss every year. So not only does the law create a perverse incentive for the insurance company to overcharge, it actually costs more to return the money than what is the amount returned! Has anyone done a study of these costs?

I chuckled when I read this as yet another Obamacare unintended consequence. But I think you underestimate the actuarial review of rates that was another feature. Insurers can propose rate increases to capture these free loans, but the rates are then subject to review and disapproval by state regulators. Of course, you will know better than I that this type of regulation is yet another rate increase mechanism as companies ask for higher increases in anticipation that they will be clawed-back.

First, 15% margin for admin and profit is significant – maybe not grocery store, but, with continued inflation… 15% of an ever increasing number?

Second, no one looks at the policy forms where the insurer did not earn 15% margin in a prior year. My bet is that every last one of those contracts has had it’s rate pumped to ensure the 15% margin.

Third, for employer sponsored plans, we are talking about 150 – 160 MM Americans, contributions can be structured so that all the amounts refunded inure to the benefit of the employer/plan sponsor. In exchange for insulating employees from the short term risk (employee contributions become defined, employers pay all costs in excess of employee contributions – at least for the current coverage period), the employer is likely to raise employee contributions… not reduce them.